Investment Case

Allergy Therapeutics is a UK-based specialty pharmaceutical company focussed on the diagnosis, prevention, and treatment of allergy. It has an established and productive commercial infrastructure in the major European markets and approved manufacturing capability, with validated supply chains. There are several proprietary allergy immunotherapy (AIT) vaccines in clinical development for specific grass or tree pollen allergies, as well as a novel VLP-based peanut vaccine. Allergy was formed in 1999 as a management buy-out of SmithKline Beecham’s Bencard operations (originally founded in 1934 and acquired by Beecham in 1949) and floated on AIM in 2004. It has raised c £85m in capital to date, most recently £10m in 2018. Allergy employs c 600 employees globally, with R&D mainly in the UK and the c 150-strong commercial teams based across Europe.

Valuation

We value Allergy Therapeutics using a DCF-based model for the commercial operations together with an rNPV contribution for the key elements of the R&D pipeline. Although there is also an inherent value in the technology platforms, we have opted to not include these yet and they remain as potential upside. The conservative approach is maintained across all our assumptions, yet still results in a valuation that is higher than attributed by the market. Our valuation is £341.6m, equivalent to 53.1p per share, of which the commercial operations contribute £87.8m and the pipeline £232.5m (13.6p and 36.1p per share, respectively).

Financials

H122 results were robust given ongoing headwinds in some key markets, plus the effects of industry wide portfolio streamlining, with £48.7m in revenues representing a reported 10% decline (-5% CER), but +4% CER growth on a like-for-like product and phasing basis. R&D expenses were £5.0m, from £4.7m, reflecting clinical spend to support the now completed G309 Pollinex Quattro Grass MATA MPL pilot Phase III trial. R&D is expected to increase this year and next to support both the G306 Grass MATA MPL pivotal Phase III and the Phase I VLP Peanut trials, both due to start this year. Cash resources at end-December 2021 were £41.4m, which should be sufficient to fund the planned clinical trials and could be further supported by a £10m revolving credit facility, if needed.

Sensitivities

The key sensitivities relate to the pipeline, notably Grass MATA MPL and VLP Peanut, and the usual risks associated with clinical development, but heightened due to the perceived higher uncertainties experienced with previous high-profile allergy trials. Additionally, any slowdown in the European base business and/or higher costs for clinical development could lead to a financing need ahead of expected clinical data, albeit the enlarged £10m facility reduces this risk materially in our view. Other sensitivities relate to ensuring adherence to manufacturing standards, other related regulatory risks, increased competition, sustained pricing pressures, and the integrity of supply chains.

Allergy Therapeutics: ambitious and focussed

Allergy Therapeutics is delivering on its proven and clearly defined strategy: maximising the performance of its existing commercial platform; developing a suite of novel products that address well-documented needs; and preparing for geographic expansion, notably the US. The profitable and growing European base business has helped fund the development of novel R&D programmes, notably grass MATA MPL and innovative VLP-based peanut vaccines. It is these highly differentiated and clinically validated products that will enable entry into the commercially important US market. Cash resources of £41.4m should be sufficient to fund the next clinical trials for both key programmes, which are due to start this year, through to material value-inflection points next year. There could be material upside to our updated £341.6m valuation (equivalent to 53.1p per share), with the base business and cash effectively underpinning the current share price, despite a development pipeline that holds so much promise.

Allergy Therapeutics is a unique opportunity within SMID-cap healthcare, given a growing and profitable base business that is well-established, coupled with an innovative pipeline of potentially transformational products. The base business provides downside protection, an aspect that is highly unusual for most development stage biotech companies. Meanwhile, there could also be substantial valuation upside from the pipeline of R&D projects.

The business is focussed on allergy immunotherapy (AIT), mostly on subcutaneous (SCIT) injections, which aim to address the underlying causes of allergy by desensitising the patient through repeated exposure to the allergen (substance that causes the allergy). AIT is generally used to treat the most severe allergies, whereas milder allergies tend to focus on allergy symptoms relief. Our September 2020 Initiation provides a comprehensive overview of the allergy market.

Management continues to execute on a well-articulated strategy that has delivered compound annual revenue growth of 9% over the last 23 years and has led to an innovative pipeline that continues to progress promisingly. The strategy comprises three pillars for future growth that should maximise both the base business and exploit the pipeline’s clear potential:

• Continue expansion in Europe: management aims to increase its market share, register and launch new products, and ensure continued superior product quality and supply chain reliability.
• Exploit the strong pipeline: investment into innovative technologies, such as VLP, has proven to be insightful. Key development projects, Grass MATA MPL and VLP Peanut, continue to advance, with next trials starting after highly encouraging data in 2021. Extension of the MATA MPL range and new indications for VLP technology could provide new opportunities.
• Prepare for US entry: The US market could be commercially significant, and entry will be supported by the key pipeline projects; Grass MATA MPL, if successfully developed, could potentially be the first approved SCIT therapy in the US whilst VLP Peanut could have a compelling profile if a short course of injections is able to induce tolerability without allergic reactions and side effects.

Robust performance in Europe continues

Allergy Therapeutics is a key allergy immunotherapy player in Europe, with established commercial operations in 19 markets, either directly (in nine geographies, with c 140 salespeople) or through distribution partnerships (10 in typically smaller regions). These have been created through a combination of sustained organic investment coupled with astute acquisitions, such as Alerpharma in 2015 that bolstered the Spanish presence. Germany is the largest revenue contributor, with 64% of sales, (Exhibit 1) followed some way behind by Spain, 10%, then Austria 7%, Italy and the Netherlands, 5% each, Switzerland 4% and the UK 2%.

Exhibit 1: Allergy Therapeutics FY21 geographic split (left) and product mix (right)

Source: Allergy Therapeutics

Germany remains the largest AIT market in Europe and has been a key corporate focus over the past two decades, with c 150 staff at the subsidiary Bencard Allergie. In common with most European markets, sales in Germany have been impacted by COVID-19, which has led to a shift towards at-home sublingual options as patient visits to allergy clinics were affected. Germany is also particularly affected by portfolio rationalisation efforts, driven by the long-term move towards greater regulation of products, mainly the TAV (Therapieallergene Verordnung). Product discontinuations and portfolio optimisation has affected the allergy industry as a whole; for example in Q121 ALK Abello reported that product discontinuations impacted growth in Europe by c four percentage points. Notably, “portfolio optimisation” has been a key part of ALK’s strategy, with >300 products phased out between 2018-2020.

The Spanish market was especially impacted by COVID-19 given allergy clinics tend to be located within major hospitals with restrictions precluding patient access to these services. Despite this headwind, Spain continues to grow strongly. COVID-19 disruptions also continued to impact sales in Italy, which remains predominantly a SLIT (sublingual immunotherapy) market.

The Austrian market continues to grow, with Allergy Therapeutics taking market share despite the entry of new competitors. The Netherlands is also growing strongly, both for Allergy Therapeutics and the market as a whole. Meanwhile the UK remains an important market for Allergy Therapeutics, with continued growth despite the overall size being limited owing to reluctance to embrace allergy vaccines and medical preference for use of symptom relieving products. Other markets are covered through partnerships, with the most important distributor markets being Canada, the Czech Republic, Slovakia, South Korea, Greece, the Baltics, and more recently, Belarus, Serbia, and Albania.

New and existing products should help drive growth

The marketed portfolio consists of distinct ranges, which trade under various brand names depending on the geography eg Pollinex Quattro, Polligoid, and TA Gräser Top. The top seven products account for >90% of revenues. Pollinex, Venomil and Acarovac delivered double-digit growth during H122. More detail on the other products is available in our September 2020 Initiation.

• Pollinex Quattro (c 40% of sales) has transformed subcutaneous immunotherapy (SCIT) by requiring only four injections. Such ultra-short course immunity is possible due to the combination of microcrystalline tyrosine (MCT) adsorbed allergoids (a modified allergen), with monophosphoryl-lipid A (MPL) as the adjuvant. The MCT allergoids provide a similar level of immunogenicity but their improved adsorption characteristics result in a lower allergenicity. The importance of using MPL as the adjuvant should not be underestimated; it not only brings improved safety benefits over traditional alum-based adjuvants but plays an essential role in promoting the switch from a Th2-directed immune response (with IgE induction) to a Th1-directed response.
• Pollinex (c 21% of revenues) is the range of non-MPL-based SCIT that employs the same allergoids but, due to the lack of MPL, consists of six injections. It is still considered a short-course treatment compared to traditional SCIT. Pollinex is retained to address the needs of certain, more traditional, European market segments and geographies.
• Venomil (c 6% of sales) is a freeze-dried SCIT for bee and wasp sting hypersensitivity that contains native allergen. This is easily reconstituted and can be administered through the more rapid “rush” dosing regimen.
• Acarovac Plus (3% of sales) is an MCT-adsorbed allergoid product for the treatment of year-round mite allergy. This has been shown to have an improved and longer-lasting outcome than unmodified versions.

In terms of new products, Allergy Therapeutics in-licensed and subsequently launched ImmunoBON in Germany and Austria in 2021, and further launches are planned. ImmunoBON is an oral product that aims to replicate the “farm effect” phenomenon, where children exposed to farm environments are less likely to develop allergies. It is a whey protein-based food supplement which is available over-the-counter that is taken for three months. It includes specific proteins (lipocalins) which are found in raw milk and farm dust. The aim is for ImmunoBON to target milder allergies than traditional immunotherapies, which opens a new complementary market opportunity for Allergy Therapeutics that should effectively leverage the existing commercial infrastructure. Data to date suggest ImmunoBON could have utility for birch pollen and house dust mites, with plans to also explore grass, cat, dog, and horse allergies.

Substantial upside from advancing R&D programmes

The pipeline of R&D programmes should ensure medium- and longer-term growth and will be key to unlocking future value. The focus remains the development of innovative and transformational products, with the key platforms Pollinex Quattro (ultra-short course injections), and the VLP (virus-like particle) technology. The most advanced products on these platforms, notably Grass MATA MPL and VLP Peanut underpin future expansion in Europe and entry into the US. Both products have made significant progress in the last year, generating positive trial data, and both are expected to advance to the next stage of development during 2022. This will likely lead to an uptick of +£4.1m in R&D spend to c £17.0m in FY22e (vs £12.9m in FY21) to support planned trials.

Exhibit 2: Allergy Therapeutics pipeline and marketed products

Source: Allergy Therapeutics    Note: SCIT = subcutaneous immunotherapy, MATA = Modified Allergen Tyrosine Adsorbed

PQ Grass de-risked with Phase III key to unlocking value

Highly encouraging top-line data from the G309 exploratory Phase III field trial with Grass MATA MPL helps to de-risk the pivotal G306 Phase III trial, which is due to start in H222 with data perhaps around a year later, likely by end-2023. The Grass MATA MPL development programme is a key element in Allergy Therapeutics’ medium-term strategy, and assuming the positive G309 results are replicated in G306, this should help to secure both first FDA approval and market expansion in Europe. We view G306 as a critical event for unlocking future value:

• Europe: The PQ range is currently only available in Europe on a “named patient” basis, hence formal regulatory approval would remove marketing restrictions, which would then allow promotion of the clinical benefits to the wider medical community;
• US: An FDA approval would make Grass MATA MPL the first Pollinex Quattro (PQ) short course, subcutaneous and aluminium-free allergy immunotherapy available in the commercially significant US market.

Updated results from the G309 Phase III exploratory field study were presented at AAAAI (American Academy of Allergy Asthma and Immunology) 2022. These were highly positive, with both treatment groups demonstrating a statistically significant improvement over placebo based on the combined symptom and medication score (CSMS), a measure of daily symptoms and the use of relief medication, averaged over the peak grass pollen season:

• Six-week treatment group:1% improvement (p=0.0367)
• 14-week treatment group:5% improvement (p=0.01112), against the 36.8% (p=0.0088) improvement provisionally reported.

For context, but with the usual caveat of the limitations of cross trial comparisons, the FDA approved label shows ALK Abello’s GRASTEK grass sublingual tablet, when taken daily for 24-weeks, achieved a 29% improvement over placebo on TCS (total combined score, a sum of daily symptoms and daily medication scores) over the peak grass pollen season in the first season of its multi-season trial. Hence, the magnitude of benefit with Grass MATA MPL appears to be on par or better than that observed with GRASTEK. We note that whilst the GRASTEK data are from daily treatment over 24 weeks, initiated prior to onset of the allergy season, it is recommended that GRASTEK is taken daily over three years for sustained effectiveness.

Both Grass MATA MPL dosing regimens were shown to be safe and well tolerated. In addition, data from European and US study centres were comparable, suggesting the trial was robust and well conducted. Analysis of the secondary endpoints, including quality of life measures and allergy biomarkers, is ongoing, with detailed data expected to be presented at a scientific conference.

G309 was a double-blind, placebo controlled, randomised study that evaluated the efficacy and safety of a cumulative dose of 27,600 SU Grass MATA MPL. Two short courses of six injections with treatment durations of six and 14 weeks were tested. The trial ran for one year, over the 2020/21 allergy season, and recruited c 150 patients over 13 sites in Germany and the US.

The planned G306 trial will also be run in Europe and the US, and is expected to start in H222, capturing the 2022/23 allergy season. It is likely to involve 900-1,200 patients and more than 100 trial sites, starting ahead of the next hay fever allergy season, with patient recruitment likely to begin around August. The design of the planned G306 trial will be informed by full data from G309.

If G306 is positive then pivotal trials for the PQ MATA MPL range to include Birch and Ragweed for the US portfolio would likely be initiated, subject to funding.

VLP peanut allergy vaccine progressing to Phase I

Allergy Therapeutics recently received FDA clearance to initiate the Phase I PROTECT study for its novel VLP (virus-like particle) short course peanut allergy vaccine candidate, with first data now expected H123 (originally these results were forecast for Q423). Given the severe and potentially fatal consequences of peanut allergy and the still limited treatment options, there may potentially be an expedited regulatory path to market, which could allow for initial commercial availability as soon as late-2026. We forecast modest peak sales of $339m (£261m), an undemanding estimate given the substantial multi-billion dollar market opportunity, and continue to assume a more conservative 2028 launch, with VLP Peanut contributing only c 20% of our valuation.

The Phase I US-based PROTECT study of VLP Peanut is due to start in coming months (COVID-19 permitting). VLP Peanut clinical product has already been manufactured, tested, and released to enable prompt Phase I initiation. The trial will include a number of adult patient cohorts that will be recruited in a stepwise protocol for safety reasons and to confirm that the vaccine does not induce severe allergic reactions. The first stage will involve non-allergic healthy volunteers, then proceeding to skin prick tests in adult peanut allergy patients, before embarking on the subcutaneous injection stage. As mentioned, top line results are now expected during H123. Paediatric and adolescent peanut allergy patients, which will be key for commercialisation, will be assessed in future Phase II proof-of-concept trials. These could start as early as 2024 pending Phase I PROTECT data that will guide the Phase II design.

If Phase I and II clinical trials confirm the profile seen in the highly promising preclinical studies, which were replicated in the Imperial biomarker study, then the clear medical need for such a potentially life-saving treatment could allow for an expedited approval pathway, with potential for first commercial availability as soon as late-2026. Importantly, preclinical data support a short course approach likely consisting of only a handful of injections, which could be a key differentiator to drive uptake, especially if the vaccine also does not induce allergic reactions (discussed below), as parents are generally reticent to subject their child to multiple and frequent injections.

Recent impressive data from the P001 ex vivo biomarker study and prior preclinical studies suggest that VLP Peanut could induce long-lasting protective immunity without inducing allergic reactions (hypoallergenic) after only a few injections. This profile could potentially transform the lives of peanut allergy sufferers, given existing oral immunotherapy Palforzia, and later-stage development therapies, including transdermal patches, require daily dosing over several years. Palforzia use is also associated with frequent side effects.

Specifically, data from the P001 biomarker study in collaboration with Imperial College London, which met all primary and secondary endpoints, demonstrated:

• A 24-fold reduction in basophil (white blood cells involved in allergic reactions) activation and histamine release with VLP Peanut post challenge compared to recombinant peanut allergen (Ara h 2), implying a reduced likelihood of VLP Peanut causing an allergic reaction when administered to patients (note that the target was a 10-fold reduction);
• The notable shift from an allergic T-helper type 2 (Th2)-dominated response to a tolerogenic Th1-dominated response in a dose-dependent manner, suggesting a lasting change from an allergic to a tolerant reaction.

Peanut allergy is a major clinical opportunity

We continue to believe that the VLP-based peanut vaccine is a major opportunity for Allergy Therapeutics. Peanut allergy remains a leading cause of severe and fatal food-induced anaphylactic reactions and one of the most common food allergies, especially in children. It affects around 1.2% of Western populations, rising to about 2.5% of the paediatric population. Prevalence continues to rise, with the number of reported peanut allergies in the US more than tripling over a twenty-year period. The economic burden is material, with US hospitalisation costs alone estimated at c $600m pa as some 40% of children have experienced at least one anaphylactic event. Currently, most peanut allergies are managed with strict avoidance, prompt recognition of allergic reactions, and rapid use of intra-muscular epinephrine (better known by the EpiPen brand name) and other supportive therapies for anaphylaxis.

Aimmune’s Palforzia is a powder containing peanut allergens that is mixed with semi-solid food, such as yoghurt, and orally ingested in increasing amounts over a period of about six months. Over time, the patient’s immune system becomes desensitised to peanut allergen and can tolerate exposure to larger amounts of peanut protein. After the dose escalation period, the patient continues to take a daily therapeutic dose to maintain desensitisation. Palforzia was approved by the FDA in January 2020. In September 2020 Nestlé acquired the remaining shares in Aimmune for $2.8bn. Palforzia sales are not disclosed by Nestlé, hence the initial launch trajectory and commercial success vs consensus peak sales expectations of c $1bn for Palforzia at the time of the acquisition cannot be assessed.

In Europe, Palforzia was approved in December 2020. Pricing and reimbursement discussions are ongoing hence commercial uptake to date is likely limited. The UK’s National Institute for Health and Care Excellence (NICE) recommended Palforzia for use in the UK in December 2021. Most recently Germany’s Institute for Quality and Efficiency in Healthcare (IQWiG) issued a more negative conclusion, finding that Palforzia had “lesser benefit” than a peanut-avoiding diet on patient relevant outcomes, with benefits only seen in a single “artificial surrogate endpoint”. There was no decrease in allergic reactions following accidental peanut exposure, nor in overall allergic reactions.

Despite commercial availability of Palforzia, a meta-analysis reviewing the efficacy and safety of oral immunotherapy concluded that “safer peanut allergy treatment approaches…are needed”. We note that according to the FDA and EU labels, the most common side effects observed with Palforzia include: abdominal pain (49.4%), throat irritation (40.7%), itching (33.7%), nausea (33.2%), vomiting (28.5%), hives (28.5%), itching in the mouth (26.0%), abdominal discomfort (22.9%), and upper abdominal pain (22.8%). In addition, given the risk of anaphylaxis associated with Palforzia, in the US it is only available through a Risk Evaluation and Mitigation Strategy (REMS), which restricts use.

DBV Therapeutics has developed a transdermal patch through its Viaskin platform that delivers desensitising peanut allergens through the skin. Following extensive clinical trials it was submitted for FDA review but received a Complete Response Letter in August 2020 that focussed on the patch technology itself, particularly the adhesive properties. In December 2021 DBV announced plans to initiate a new pivotal Phase III study using a modified patch which is 50% larger than the original Viaskin Peanut patch. In parallel, DBV also withdrew its regulatory filing in Europe given objections raised by the CHMP (Committee for Medicinal Products for Human Use) citing limitations of the data from a single pivotal study.

There are 147 studies listed on clinicaltrials.gov for peanut allergy, of which 13 are industry sponsored studies and listed as “active” (recruiting, active, or not yet recruiting). Beyond Palforzia and Viaskin Peanut, most programmes appear to be at a similar stage to VLP Peanut, with early-stage development either already ongoing or set to commence this year. These include:

• COUR Pharmaceuticals’ CNP-201, nanoparticles containing peanut protein, currently in a Phase Ib/IIa trial which started in October 2021;
• Vedanta Biosciences‘ VE416, a defined bacterial consortium, in Phase I/II in combination with peanut flour which started in June 2019;
• Intrommune Therapeutics’ INT301, a toothpaste designed to deliver peanut allergen through the oral mucosa, in a Phase I dose escalation;
• ALK-Abello’s peanut allergy immunotherapy tablet, which recently completed a feasibility study using Catalent’s Zydis fast dissolving tablet technology, with clinical studies expected to start H122; and
• Aravax’s PVX108, a vaccine which uses peptide fragments to reduce the risk of anaphylactic reactions, has received FDA IND clearance to initiate a Phase II study, expected to start later in 2022.

In addition, a number of antibodies, including ligelizumab (Novartis), Xolair (Roche/Novartis) and Dupixent (Sanofi/Regeneron) are also being investigated as potential treatments for peanut allergy. We note that Sementis, an Australian company, which is investigating the use of a modified smallpox vaccine, received a $678k grant in December 2020 to advance development, albeit the current status has not been disclosed, to our knowledge.

VLP Platform could have broad potential

The VLP Peanut vaccine is the leading programme employing the VLP technology platform. If successful, the suggested potency and flexibility mean it could be developed for other conditions such as cat, mould, and house dust mite allergies as well as venom and stings. It is worth noting that management has secured broad licenses for uses as diverse as solid tumours (notably melanoma), asthma, atopic dermatitis, and psoriasis.

The VLP platform is a vital element in the vaccine’s effectiveness; it is derived from Cucumber Mosaic Virus and includes tetanus toxin epitopes. So, in addition to the immunogenic properties due to the repetitive three-dimensional scaffold (which gives B-cell activation) and the RNA content (stimulates Toll-like receptor 7 and Toll-like receptor 8), it contains the universal T-cell epitope derived from the tetanus toxin. Almost all people have a pre-existing T-cell memory for tetanus toxin, and its incorporation boosts T-cell responses. Similar VLP platforms have proven their ability of inducing long-term protective antibodies and their safety has been demonstrated in widespread clinical use; commercially available VLP-based vaccines include Cervarix and Gardasil (HPV) and Sci-B-Vac (hepatitis B).

US market: an attractive and sizeable opportunity

The US is a large and dynamic market, with around 50m people experiencing some form of allergy ranging from seasonal rhinitis (8.2% of the population) to severe reactions to stings, such as wasps, (5.3-7.8%) and foods, notably peanut, (10.8%). The incidence, much like all industrialised countries, is rising and, with severity increasing too, the economic and societal costs are growing. Most of this patient population is treated with symptomatic therapies, such as antihistamines and steroid preparations and/or epinephrine (adrenalin) injections, as necessary.

Whilst the number of visits to general physicians for non-emergency allergies has fallen, presumably reflecting greater self-medication, the number of visits to specialist “allergists” has risen around a third over the past decade. This rise in demand has not been matched by an increase in physicians, with the number of certified allergists remaining around 5,000 (out of 700,000 practising physicians). These specialists tend to see the more debilitating or complex cases and are the ones typically considering allergy immunotherapy (AIT) as a main treatment option. Most operate out of specialist clinics and within general hospitals, sited mainly in urban areas. Anecdotally, it is estimated 2m-3m patients currently receive some form of AIT.

US AIT market has different characteristics to Europe

Despite the common therapeutic rationale, there are significant differences in clinical practices between the US and Europe: ranging from diagnosis through therapy selection to product manufacture. One of the most noticeable differences is that, despite FDA approval of four SLIT (sublingual) treatments, the market remains dominated by SCIT (subcutaneous) injections, so-called “allergy shots”. It was thought that avoidance of a lengthy course of subcutaneous injections requiring regular physician visits would tilt patient preferences towards SLIT, and/or would appeal to the large group of patients that ultimately refuse the shots owing to, for example, a needle phobia.

However, sales of the US SLIT treatments remain muted; ALK Abello reported c $18m in sales in 2021 across its portfolio of Grass, Ragweed and House Dust Mite tablets following initial approvals in 2014 and an effective relaunch after 2016 when commercial partner Merck returned rights. The barriers to adoption appear to be the more favourable physician reimbursement for the allergy shots, based on patient consultations and preparation of the custom treatment, and that most patients have sensitivities to more than one allergen, which cannot be addressed with a single allergen SLIT therapy.

The biggest difference lies in the preparation of the SCIT; in the US, most treatments are individually prepared aqueous mixtures of allergens that are taken from standardised stock bottles. These are typically made on the clinic’s premises using simple methods, with scant, if any, regulatory oversight. With these “home brews” there is little use of allergoids, and, more importantly, adjuvants such as MCT, or even alum, are seldom employed. This results in treatment regimens that need a slow dose build up, to reduce allergenicity, and long treatment durations, because of poorer immunogenicity. Understandably, there is no rigorous clinical evidence to support their efficacy or demonstrate safety.

From the patients’ perspective such therapies are suboptimal as they usually take between six to 12 months to become effective. Whilst the prospect of treatment durations of 50 plus injections over a three to five year period may have clear appeal for some clinicians, most patients fail to complete their courses with anecdotal evidence suggesting as few as one in six are wholly compliant. Interestingly, it is estimated that only half of patients even start their treatment.

It is into this environment that Allergy Therapeutics is seeking to be the first to introduce a registered SCIT with the Grass indication of its Pollinex Quattro range. The prospect of a standardised vaccine that is made in GMP-certified production facilities, supported by demonstrable clinical evidence, approved by the FDA, requiring only four to six injections to complete the treatment, and showing efficacy in a matter of weeks, should have significant patient appeal.

Launching PQ Grass requires careful positioning

Assuming management is able to successfully complete the PQ Grass clinical programme and obtain FDA approval, the key question centres on how to capture a meaningful share of this lucrative market. The obvious barrier is the inherent, and understandable, inertia of allergists to change existing practices, whilst addressing the general physician market would be time-consuming, especially the educational elements, and costly in terms of marketing and sales coverage. The general physician route would, in our view, need the help of a commercial partner with patience, deep pockets, and a sizeable commercial footprint.

Exhibit 3: Preparing for US entry

Source: Allergy Therapeutics

In contrast, targeting c 5,000 allergists can be done with a relatively small and focussed salesforce, with a limited educational need. The key step, in our view, would be to position PQ Grass as the product that could be employed with that large segment of patients whose symptoms are sufficiently severe to motivate them to visit a specialist clinic, but not debilitating enough for them to persevere with a “home brew” course completion. Essentially it would be appealing to an allergist’s financial sense in that he/she could stratify patients to achieve the optimal balance between clinical outcomes – with a short PQ course for those likely to not comply with a traditional approach – and maximising their economic value. Obviously, the rollout should be expected to take time as the experience of the early adopters becomes known and accepted among the wider allergist community.

The process does require the creation of a supportive environment with extensive use of key opinion leaders (KOLs) to influence prospective users. Equally importantly, again in our view, would be the use of selective direct-to-consumer (DTC) media campaigns, including seasonally optimised television advertising. These, coupled with smart social media and PR programmes, could help drive a sizeable new patient demographic away from symptomatic treatment (either via general physician or self-medication) to the allergist’s office for such “novel” therapeutic options. This would tip the financials favourably for even the most traditionally minded allergists and, importantly, the “capture fee” of each new patient would be particularly cost-effective for the first entrant to the market.

Management estimates US peak sales potential for Grass MATA MPL at $300m-$400m per annum but has yet to articulate its preferred approach. Our view suggests that to gain a meaningful share of such a large and nascent market requires bold thinking, careful planning, and the continuing devotion of sufficient resources over a number of allergy seasons. Whether this is done alone, which is a practical option, or through a partner will depend on the scenario planning that management has likely already undertaken and, to some extent, on investors’ appetite for funding such an ambitious launch campaign.

VLP peanut allergy vaccine should be altogether easier

In contrast to the PQ range, the marketing processes required for introducing an innovative and effective therapeutic vaccine for peanut allergies is much more straightforward. Here the unmet medical need is high, the patient (or rather carer) awareness is great, and the genuine treatment options are currently few. The VLP peanut vaccine would be ideally suited for the general physician segment as well as allergy specialists. Assuming its clinical profile does deliver on its early preclinical promise, then this could be a sizeable product with commercial potential determined largely by its pricing point rather than patient accessibility and numbers. As we mentioned earlier, this could be a game changer for Allergy Therapeutics.

We do not envisage Allergy Therapeutics launching this product alone. The commercial potential would clearly attract the larger primary care focussed pharmaceutical companies and it is unlikely that finding a suitable partner would be difficult. The caveat is that the data so far are early and VLP Peanut requires testing in extensive clinical trials. However, the potential is such that even when adjusted for such risks the contribution that an effective peanut vaccine makes to Allergy Therapeutics’ investment case is noticeable.

Sensitivities

In common with most innovative pharmaceutical companies the three main sensitivities relate to the clinical and regulatory aspects, the execution of commercialisation plans, and the financial resources required to accomplish these. More specifically, the key near- and medium-term sensitivities are directed to the clinical progress of the two main development programmes.

• The Grass MATA MPL Phase III trial is a defining step as it will enable regulatory approvals in Europe and the US. In Europe it will broaden its prescribing beyond “named patient” basis, but its importance lies in opening up the sizeable potential of the US market. Whilst the pilot Phase III study (G309) was highly positive, helping to de-risk the planned pivotal Phase III trial (G306), the uncertainties inherent in predicting outcomes in Phase III allergy trials are unfortunately well documented.
• The peanut VLP vaccine is innovative in its design and, whilst other VLP platforms have arguably paved the way with their market-proven safety and efficacy, the only evidence to date is preclinical. The hard miles will be in the later development phases, especially Phase III. Certainly, the clinical, societal, and commercial rewards of a successful peanut vaccine are, in our view, sufficiently plentiful to warrant any such incremental risks.

Late-stage clinical trials in allergy indications have a history of delivering negative surprises. For example, Circassia was badly dented by the high-profile demise of its cat allergy therapy in pivotal Phase III trials, as was Allergy Therapeutics itself when its study in birch disappointed. There has been much examination of the learnings from these and the G309 study seeks to ensure they have been applied.

Regulatory outcomes are hard to predict for all pharmaceutical products, which always introduces uncertainty even if clinical data are positive. Regulators can shift goalposts, can reject products, or delay approval for various often unforeseen issues such as manufacturing. For example, regulatory delays and setbacks have overshadowed DBV’s Peanut Patch. In Europe, approval processes for the existing allergy products seeking registration as part of the TAV ordinance can be protracted and iterative. In the US, allergen extracts are currently excluded from the typical PDUFA (Prescription Drug User Fee Act) process, which makes timelines less certain; however these are generally set to be included from 1 October 2022 under the latest PDUFA VII iteration.

Manufacturing and supply chain management are critical areas for all drug companies, with strict oversight of all aspects of the processes. Even minor breaches can result in serious consequences, with the associated costs and reputational damage. Allergy Therapeutics has modern, well-equipped, and high-quality production facilities in the UK and Spain that are FDA compliant.

The US is planned to represent a major medium-term growth opportunity, with the innovative element of the R&D efforts having this commercial potential firmly in its sights. However, Allergy Therapeutics has yet to articulate its strategy to access this sizeable, but complex and fragmented, market. Whilst this may be for understandable competitive sensitivities at the moment, the lack of visibility will remain an issue until some clarity is forthcoming.

Valuation

Our valuation for Allergy Therapeutics continues to be based on a combination of an rNPV model, with risk-adjusted NPVs calculated for the key development programmes, combined with a DCF of the base business comprising detailed expectations of the European cash flows over a five-year forecast period. Based on our updated assumptions outlined below, this results in a valuation for Allergy Therapeutics of £341.6m, equivalent to 53.1p per share. The commercial base business contributes £87.8m (13.6p/share), with the pipeline valued at an additional £232.5m (36.1p/share).

Exhibit 4: Allergy Therapeutics valuation summary

Source: Trinity Delta   Note: $/£ FX rate of 1.3; 10% discount rate for commercial business, 12.5% for pipeline

For the revenue generating and profitable base European business we forecast market growth of 6-7% with no market share gains (history would suggest this is arguably over-conservative), coupled with a modest 2% terminal growth rate, and 10% cost of capital. On this basis, we view this business alone as worth £87.8m (13.6p/share), which with net cash of £21.3m (3.3p/share) underpins much of the current share price.

This provides a level of downside protection that is unusual for a company that also has potentially transformational R&D projects in the pipeline. The implication is that the pipeline is under appreciated. This seems unwarranted given our valuation suggests that the pipeline, even on a risk-adjusted basis with undemanding peak sales assumptions, is worth £232.5m (36.1p/share), markedly more than the base business.

For Grass MATA MPL we forecast combined peak sales of $216m in the US and Europe at 55% probability of success, with the latter largely reflecting the unpredictability of late-stage allergy trials, despite recent compelling pilot Phase III data. Our sales forecasts are relatively conservative given management estimates US peak sales alone could be $300m-$400m pa. If these can be achieved, then there could be substantial upside to our valuation.

Our peak sales for VLP Peanut of $339m are undemanding given estimates for the peanut allergy market of $8bn and consensus peak sales estimates for Palforzia at the time of the Nestlé acquisition of c $1bn. If VLP Peanut can deliver on the promise of its preclinical profile, providing a hypoallergenic vaccine that is immunogenic and effective with just a few injections, then there could be significant upside to our current peak sales estimates. Given the early stage of development we assign a 7% probability of success to VLP Peanut.

Remains undervalued vs peers

Despite the progress made with the pipeline in the past year, the share price is broadly unchanged at 21.8p, albeit reaching 40.5p post FY21 results. The shares have receded from this high despite initial positive Grass MATA MPL Phase III and VLP Peanut preclinical biomarker data. For reference, the XBI (S&P Biotech Index) declined 45% in the last 12 months and the NBI (Nasdaq Biotech Index) is down 20% over the same period.

At the current share price Allergy Therapeutics has a market cap of c £152m (c $204m) and a prospective EV of c £131m (c $176m) and is trading at a prospective EV/Sales of 1.7X, although the rising R&D spend means EV/EBITDA no longer applies. This is below quoted peer ALK-Abello, the Danish company that is the leading player in the allergy immunotherapy field and has a Peanut immunotherapy at a similar stage of development. Multiples are not appropriate for DBV Technologies given the company is loss making without sales. Nevertheless, whilst DBV’s EV of c €94m ($104m/£77m) is below that of Allergy Therapeutics, this can only really be attributed to the ViaSkin Peanut Patch:

• ALK-Abello has a market cap of DKK27.9bn ($4.19bn/£3.11bn) and net debt of DKK516m ($77.4m/£57.7m), which gives an EV of c DKK27.4bn ($4.11bn/£3.07bn). Hence, based on FY22 guidance for revenue CER growth of 8%-12% implying sales of c DKK4.2-4.4bn ($635-660m/£474-492m), with EBITDA of DKK625-725m ($94-109m/£70-81m) this suggests a 6.2-6.5X EV/Sales multiple, and EV/EDITDA of 38-44X.
• DBV Therapeutics is a clinical-stage company whose lead product, a patch for peanut allergy, now must complete additional Phase III trials prior to refiling in the US and Europe. The share price remains muted at €2.36 (from €23.52 in early 2020 and all-time highs of c €80). Its market cap is €135m ($149m/£111m), which with cash of $98m at end September 2021. Allowing for cash burn, DBV is expected to end FY22 with cash of c $45m. This suggests a prospective EV of c €94m ($104m/£77m), which is likely all attributed to Viaskin Peanut. This compares well with the rNPV of £69.5m we assign to VLP Peanut but does suggest the current Allergy Therapeutics share price places too little value on the R&D programmes.

Financials

Allergy Therapeutics’ H122 revenues were £48.7m vs £54.0m in H121. Whilst this represents a reported 10% decline (-5% CER) it masks the impact of portfolio streamlining and phasing. On a like-for-like product and phasing basis, H122 sales increased +4% CER. This is a robust performance given continued headwinds in Germany, the company’s largest market representing c 64% of sales, plus ongoing COVID-19 disruptions in Germany and Italy. However, the easing of COVID-19 restrictions across Europe has facilitated access to treatment. In Spain, Allergy Therapeutics’ second largest market, double-digit growth was achieved. This is notable as in Southern Europe,allergy clinics tend to be located within major hospitals, with restrictions therefore having a more noticeable impact on sales in these regions. While restrictions have started to ease, access is unlikely to have returned to pre-pandemic levels. Other key markets including the Netherlands and the UK also grew strongly. Encouragingly, key products Pollinex, Venomil and Acarovac all grew by double-digits.

Exhibit 5: Long-term revenue growth trend – 9% CAGR over last 23 years

Source: Allergy Therapeutics

Gross profit decreased by 14.9% to £35.9m (H121: £42.2m), with gross margin of 74%, against 78% previously, as the lower sales due to portfolio rationalisation affected manufacturing overhead recovery. Operating profit, excluding R&D spend, dropped similarly to £12.5m (H121: £20.5m), with a margin of 26%, against 38% previously. This reflects higher sales, marketing, and distribution costs of £13.1m (H121: £12.4m) due to planned increases in activity and a rise in administrative expenses to £10.6m (H121: £9.6m) as infrastructure investments were made (notably in IT). R&D expenditure is written off as it is incurred and was £5.0m, against last year’s £4.7m, reflecting the costs of preparing for the VLP PROTECT study and completing the G309 Grass MATA MPL trial. Reported operating profit was £7.4m (H121: £15.8m) with pre-tax profit of £7.3m (H121: £15.6m). Similarly, net profit (after tax) was £6.7m (H121: £14.9m) and EPS was 1.04p (H121: 2.34p), with EPS (diluted) of 0.97p (H121: 2.19p).

Cash and cash equivalents at 31 December 2021 were £41.4m (from £48.3m at 31 December 2020 and £40.3m at 30 June 2021). Current borrowings were £1.0m, with lease liabilities of £0.7m (FY21: £1.0m with £0.8m lease liabilities) and long-term borrowings were £1.9m with lease liabilities of £6.4m (FY21: £2.5m with lease liabilities of £7.0). There is a natural first-half bias to performance due to the seasonality of allergy treatment, with more cash generated in the first half of the year from operations (ex-R&D). Since period end Allergy Therapeutics has also secured a £10m three-year revolving credit facility to replace an existing £7m banking overdraft.

Looking ahead, we expect lower sales for FY22 of £78.3m, with growth resuming in FY23 (£81.1m, up 3.6%), driven by continued gains in the key European markets that should offset the enduring weakness we expect in Italy. Our forecasts expect a marked reduction in COVID-19 impacts, with the proviso that events may alter our expectations. These forecasts are based on the allergy immunotherapy market maintaining growth rates of 6%-7% five-year CAGR and Allergy Therapeutics making modest share gains over this forecast period.

Operating profit before R&D is expected to be £5.3m in FY22 and £5.0m in FY23, with R&D expenditures of £17.0m and £22.1m respectively as investment is made in the second Phase III trial or Grass MATA MPL and Phase I study for the peanut VLP vaccine. Non-R&D operating costs are expected to rise broadly in line with sales resulting in a reported operating loss of £11.7m in FY22 and £17.1m in FY23, which equates to a net loss of £13.2m and £19.2m at FY22 and FY23, respectively. The resulting cash outflows of £16.0m and £7.8m mean we expect the net cash position to be £21.3m at end-FY22 and £13.5m at FY23. These cash balances, coupled with the £10m revolving credit facility, mean management is confident it can fund the Grass MATA MPL Phase III trial (G306), as well as the VLP Peanut Phase I PROTECT trial, from existing resources.

Exhibit 6: Summary of financials

Source: Company, Trinity Delta 

Contact details

Dominion Way,
Worthing,
West Sussex,
BN14 8SA,
United Kingdom

www.allergytherapeutics.com

Top institutional shareholdings

Source: Source: Allergy Therapeutics (as of 8 February 2022)